Outlook for 2010: sunny spells ( 480,32 KB )

 

Will emerging countries break away from mature economies?

  One of the issues that might affect 2010 in economic terms is the role to be played by emerging economies. During the difficult years of 2008 and 2009, debate raged concerning the capacity of China and the main emerging economies to sustain their expansion when the United States and other industrialized countries were entering recession. This phenomenon became known as decoupling. This issue is still relevant and the question now is whether this decoupling will intensify in 2010 and beyond. To answer this question thoroughly we must look at three stages. Firstly, defining precisely what decoupling is and isn't. Secondly, measuring the phenomenon. Then, and only then, will we be able to plausibly predict future decoupling trends.

  In its strictest sense, the decoupling of two economies or groups of economies means that both exhibit a limited degree of cyclic synchronization. Defined thus, decoupling combines two complementary aspects. First we must understand what academic literature has come to call pure synchronicity. Behind this somewhat cryptic expression lies the simple fact that two economies can be situated in the same phase of the cycle (expansion or contraction) or not. A second aspect of decoupling concerns the distance separating the cycle positions of two economies.(1)

  The importance of this distinction can be appreciated by means of a simple numerical example. The starting point must be some measurement of an economy's cyclic position. The most usual measurement is the so-called output gap, i.e. the distance between the gross domestic product (GDP) of an economy at a specific point in time and the trend in or potential GDP. Potential GDP is the GDP that is compatible with the full use of output factors. Economic cycles are therefore defined by alternate positive and negative output gaps.

  Based on these measurements, two economies will therefore record decoupling when either there is a positive output gap in one and a negative gap in the other (i.e. an absence of strict synchronicity) or the distance in absolute terms between both output gaps is significant. In order to use more direct terminology, we will call the first case «sign» decoupling (as we are comparing the positive or negative sign of the output gaps) and the second case «intensity» decoupling, as in this case the distance between output gaps is compared. The results of these two measurements are presented in the two graphs below.

  In the first of these graphs, an indicator of «sign» decoupling has been calculated so that, when two economies record an output gap of the same sign, the indicator gives a result of +1, while if the sign of the gaps is different, the result is 1. A comparison is made between the average of 24 industrialized economies and a set of 22 emerging economies. As can be seen, the degree of «sign» synchronicity has tended to fluctuate during the current decade up to the outbreak of the worldwide economic crisis. In fact, two clearly different patterns of behaviour can be distinguished. Between 2000 and 2005, the degree of sign synchronicity was highly volatile, alternating years with the greatest synchronicity in the decade and others with the least. Since 2006, the overall trend has been towards greater synchronicity, fluctuating within a narrower range. This structural change has been related to the advance of globalization throughout the first decade of the millennium.

  Focusing now on the recent crisis, during its early stages (2006 and 2007) an increase was noted in cyclic synchronicity between industrialized and emerging economies. In 2008, synchronicity intensified when the worsening of financial tensions coincided with the entry into recession of numerous economies at the end of the year. Only in 2009, when the crisis was probably in its most extreme phase, did «sign» decoupling increase. From then on, and based on the growth forecasts given by the International Monetary Fund (IMF) for the period 2010 to 2012, we will have two years of another decline in «sign» decoupling and then, in 2012, it will return again.

  The «intensity» decoupling indicator, a less volatile and more accurate measure of decoupling, provides similar findings. First off, it also shows a trend towards less decoupling between 2006 and 2008, as well as confirming the slight increase in 2009. Based on the IMF forecasts, the phenomenon should subside in 2010 and 2011 but in 2012 should return to similar decoupling levels as in 2009. In short, the answer to whether 2010 will be a year of decoupling is in the negative. Provided the world economy takes the route expected by the Fund, neither the «sign» nor the «intensity» indicator supports the notion of a year of intense decoupling. What might be behind this predicted trend?

  The discussion of the determining factors that lie behind the degree of cycle synchronicity between economies is not fully conclusive as results depend on the interaction of many different factors, such as the type of economic shock experienced (particularly whether it is global or specific to a country or sector) and the type of transmission channel between economies. However, there are three factors that may lead to lesser decoupling in 2010. Firstly, it seems that, in the second half of 2009, emerging countries have «advanced» in the cycle, a circumstance that is likely to abate in 2010 when industrialized economies improve their rate of business. A second factor that might contribute to greater global synchronicity is the recovery in international trade, partly due to credit gradually getting back to normal, making it easier for the push made by some economies to be passed on to others more intensely and rapidly. Lastly, this same improvement in credit should boost the incipient recovery in the global investor cycle. In 2011, these three trends will intensify but afterwards... afterwards the emerging countries will probably go back to their old ways again. In summary, the decoupling debate, like the phenomenon itself, seems destined to go through numerous appearances and disappearances.

  (1) For a complete explanation of the methodology and an example of its application, see Mink, M., Jacobs, J.P.A.M. and J. De Haan (2007). «Measuring synchronicity and co-movement of business cycles with an application to the euro area», CESifo Working Paper, no. 2112.

  This box was prepared by Àlex Ruiz

  International Unit, "la Caixa" Research Department

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